Beyond Consultancy: The Supreme Court of India Reaffirms the ‘Fixed Place’ PE Threshold in Hyatt International

Beyond Consultancy: The Supreme Court of India Reaffirms the ‘Fixed Place’ PE Threshold in Hyatt International

The concept of a Permanent Establishment (PE) serves as the cornerstone of international taxation, determining a source country’s right to tax the business profits of a foreign enterprise. In a significant judgment delivered in 2025, the Supreme Court of India, in Hyatt International Southwest Asia Ltd. v. Additional Director of Income-tax, reinforced the principles of operational control and physical presence. The Court held that a foreign entity exercising "pervasive control" over a hotel's operations in India constituted a fixed place PE, moving well beyond the realm of mere advisory services.

This article provides a detailed analysis of the ruling, contextualizing it within the established frameworks of Article 5 of the Model Tax Conventions and prior judicial precedents.

1. The Factual Matrix: Operational Control vs. Advisory Services

The core dispute centered on whether the activities of Hyatt International Southwest Asia Ltd. (the Assessee) in India amounted to a PE. The Assessee operated under a Strategic Oversight Services Agreement (SOSA) with Indian hotel owners. The Assessee argued that its role was consultative. However, the Supreme Court scrutinized the substance of the agreement and the actual conduct of the Assessee.

Key factual findings by the Court included:

• Pervasive Control: The Assessee had the authority to appoint and supervise the General Manager and other key personnel, manage operational bank accounts, and implement human resource and procurement policies.
• Strategic Autonomy: The Assessee controlled pricing, branding, and marketing strategies.
• Unilateral Authority: The Assessee could assign personnel to the hotel without requiring the consent of the hotel owner.

2. Legal Analysis: The ‘Fixed Place’ PE Threshold

Under Article 5(1) of the OECD and UN Model Conventions, a PE is defined as a "fixed place of business through which the business of an enterprise is wholly or partly carried on",. For a fixed place PE to exist, three essential characteristics must typically be met: the existence of a place of business, the fixed nature of that place (stability), and the carrying on of the business through that place.

In Hyatt, the Supreme Court applied the tests of stability, productivity, and dependence to affirm the existence of a PE.

1. The ‘At the Disposal’ Test and Control

A critical element in PE jurisprudence is whether the premises are "at the disposal" of the foreign enterprise. As established in the landmark Formula One World Championship Ltd. case, ownership of the premises is not required; rather, the enterprise must have access to and control over the location to carry out its business.

In Hyatt, the Court found that the Assessee’s staff operated from the hotel premises to perform their functions. By exercising control over day-to-day operations—ranging from bank accounts to personnel management—the hotel premises were effectively placed at the disposal of the foreign enterprise to carry out its core business, satisfying the criteria for a "fixed place of business".

1. The Stability and Duration Test

The "fixed" requirement implies a degree of permanence. The OECD Commentary suggests that a place of business usually must exist for a certain period (often six months) to be considered fixed. In Hyatt, the Court noted the 20-year duration of the SOSA. This long-term arrangement, coupled with the Assessee’s "continuous and functional presence," decisively satisfied the stability test required for a fixed place PE.

3. Core vs. Preparatory or Auxiliary Activities

Article 5(4) of the Model Conventions provides a "negative list" of activities that do not constitute a PE, typically those that are preparatory or auxiliary in character. A foreign enterprise often argues that its presence is merely supportive.

The Supreme Court explicitly rejected the argument that Hyatt's functions were merely "auxiliary" or consultancy-based. The Court observed:

• The functions were not limited to setting up a pattern of activities.
• The Assessee was an "active participant in the hotel's core operational activities".
• The rights exercised extended "well beyond mere consultancy".

This distinction is vital. When an entity assumes responsibility for core revenue-generating functions—such as pricing, marketing, and key staffing—it crosses the line from being a passive advisor to an active business operator.

4. Judicial Precedents and the Evolution of PE in India

The Hyatt ruling aligns with the assertive approach regarding source-based taxation often seen in Indian jurisprudence.

• Comparison with Morgan Stanley: In DIT v. Morgan Stanley, the Supreme Court held that stewardship activities (monitoring and protecting the interest of the foreign parent) do not constitute a PE. However, in Hyatt, the Court found the Assessee’s role was "not just advisory" but involved administrative roles and active participation, distinguishing it from mere stewardship.
• Comparison with Formula One: In Formula One, the Supreme Court held that control over the circuit for a limited period (three days) created a PE because of the exclusivity and nature of control. In Hyatt, the control was not only pervasive but also spanned two decades, making the PE determination even more robust.

5. Conclusion: Implications for Multinational Enterprises

The Hyatt decision serves as a caution to multinational enterprises entering into management or oversight agreements in India. The label given to an agreement (e.g., "consultancy" or "oversight") will yield to the substance of the functions performed.

If a foreign entity retains the power to manage key operational aspects—staffing, pricing, and bank accounts—from a fixed location in India over a sustained period, it will likely be treated as having a fixed place PE. This ruling reinforces the principle that where core business functions are carried out through a physical location in the source state, the source state retains the right to tax the attributable profits.

Disclaimer: This write-up is a brief analytical overview and does not capture all aspects of the judgment. Readers are advised to refer to and read the judgment in its entirety for a complete and detailed understanding of the facts and legal reasoning.